Income Inequality Examined Japan, Germany, and the United States

If globalized economic openness is causing the labor market to fluctuate then we see a trend of OECD countries in which income inequality is widening. Industrial democracies are living in a post-industrial world. Businesses that were formerly domestic industrial sectors are now outsourcing causing a restructuring of the labor market. In this paper I will look why this economic globalization has made income inequality worse in some countries than in others since the 1980s. In Japan, the United States of America, and Germany; income inequality has stemmed from political causes such as lack of access to quality education, redistributive welfare policies, and the falling rate of unionization.

Income inequality is important to study because a more economically equal society will contribute to a stronger vibrant democracy. This requires an analysis of labor, government, and business relations to determine to what extent education, redistribution of welfare, and unionization or lack thereof are contributing to income inequality. I found that Germany, Japan, and the United States were similar in that they had the largest GDPs in the world besides China and the European Union, but they are less than average when it comes to income inequality. The Japanese Gini Coefficient as of 2015 is 0.33. The German Gini Coefficient is 0.289, and America’s Gini Coeffect is 0.394. (OECD) They all have strong technology and service sectors, are generally conservative, though they display a range of cultural differences especially between the western and eastern countries, and admittedly have very different geographies. One similarity between these countries is demographic challenges that due to low fertility rates, another is gender inequality, threatening to damage sustained long-term growth and above all are largely import heavy economies. Germany possesses a social market economy, Japan’s economic structure could be described as a state-led market economy, and America is best put as a liberal corporatist mixed economy.

In the new economically globalized world the labor-intensive products that used to be the bread and butter of the easily unionized manufacturing industry are now being made abroad or are otherwise automated. According to Barkin, this outside sourcing, meaning the importation of foreign parts and assemblies or even whole products, is creating a demand that automation is meant to fill. Employers prefer automation because its cheap and efficient labor that you don’t have to negotiate with. This increase in automation calls for more cognitive skills, and is accompanied by a simultaneous decrease of demand for the traditional manual labor.

It’s plain to see that income inequality is lower in countries were average education achievement is higher. In fact, “the Gini index decreases by one percent as secondary enrollment rates rise by 0.25 percent.” The more people that have access to high-level quality education, the more people that are going to do better in a labor market that prioritizes high skill jobs. (Checchi) By raising the average education and opening up these employment opportunities, these efforts will contribute to a greater rate of social mobility meaning a lower long-term inequality.

It stands up to reason that individuals from poor families are more likely to borrow to finance their schooling. A common structural market failure appears when people from poor families are discriminated against because of their lack of resources. Although more education is associated with higher expected income, people will only invest in education so long as they get a marginal return. As a result, the poor will not invest in education and remain unskilled and earn a low income perpetuating the unskilled status of their dynasty. The increased costs of education can be solved by redistribution achieved by fiscal policy in order to open up opportunities for tertiary education. People who come from lower incomes and receive these benefits would be able to overcome the opportunity costs of forgone income due to school attendance. (Checchi)

States with strong labor unions were likely to experience decreases in equality. This is due to the fact that labor unions more accurately represent the working poor’s interests and contribute to a more equal distribution of monetary resources. An ability to weigh in on business’s decisions is integral for the working class’s closure of the income gap. Social spending, progressive taxation, and higher wages for workers all contribute to a more equal distribution of social services. (Xu) Trade liberalization will increase income inequality in countries with high skill high technology labor. For example, the United States has been exporting technology intensive products and importing the cheap labor-intensive products. By importing these labor-intensive products that it used to make itself, the United States is losing unskilled jobs abroad. (Xu)

For the last two decades, Japan’s policies have not kept up with its post-war economic miracle when their bubbled economy popped in the 90s. Japan is unique among the countries I chose because they had just entered the industrial market in the 1980s. Japan is an example of the State-led model and is a hybrid of a social market economy and a liberal market economy. It’s considered quasi-social because there is a very strong state bureaucracy that is the foundation of the formation of Japan’s welfare state. They currently have a stellar unemployment rate of 3.1 percent and 16.1 percent of their GDP comes from trade. (OECD) In Japan, 50.5 percent of adults have a college education and often scores in the top five for major subject’s proficiency such as math and science (OECD) Workers receive generous training and strong internal promotion practices as a chief source of skill generation. This on the job human capital investment is integral to the Japanese principle of lifetime employment. There is limited wage variation across firms but within firms the declining role of seniority and merit-based raises influence the widening wage determination. (Katz)

Japan’s relatively low levels of social expenditure matches that of the United States. However, Japan categorizes welfare differently than the US. They forgo spending on social welfare and instead put that money towards investment in a very high level of expenditure towards public works. They have weak social regulation and strong economic regulations. Japan’s social insurance and healthcare system was built after the German model. Japan is the opposite of the United States in terms of its approach to the connotation of Welfare, even though they have the same levels of expenditure on social insurance as the US. In Japan, welfare is a very good word, but the Japanese tend to focus on the National Burden ratio instead, meaning the division of the sum of the tax payment and the social security contributions through national income. (Takegawa) Occupational welfare is substituted for social expenditure and in this way Japan lowers its national burden ratio. In fact, Japan even approaches welfare not from the class perspective like both Germany and the United States, but approaches it by addressing inequality though regions. These strong public works programs create employment in underdeveloped regions and thereby create a lot of protection for the low-productivity sectors. Due to the lack of competition, it is now becoming difficult for private companies to provide this welfare. There are essentially no other social protections other than healthcare and basic pensions. (Takegawa)

In the 90s, Japan’s employment protection was strongly regulated. (Takegawa) Its labor market has been subject to deregulation in the late 1990s and early 2000s. Although Japan entered the 80s with already a very decentralized enterprise union structure, in 1989 power resources declined as a result of the process of labor market deregulation as it lowered union density by increasing the number of unorganized non-regular workers, meaning they work part-time. Japanese union density hit 17.7% in 2013. The 1993 part-time work law deregulated the labor market by allowing more part time workers into the system, thereby fragmenting the union density. Rengo was established in 1989 and was created to bring more strength to the bargaining position of unions to promote policy and other institutional reforms. Rengo initially had 8 million people, but in 2012, there were 6.8 million members. The decline in union membership causes for there to be less dues. Without a sufficient amount of dues there will be less resources for the unions to pull through their collective bargaining initiatives. (Watanabe) Japanese union structures are noteworthy because of its enterprise union structure. Work practices traditionally include individualized worker involvement in workplace quality, senior-based pay systems and a commitment to life-time employment. (Katz) Due to a significant increase in part time workers in the service sector there has been a resulting replacement of regular workers. In fact, Unions were entirely removed from the policy making process in 2001. A new labor standards law radically changed the structure of collective-bargaining in Japan. The new standards law that went into effect mandates that unions need to represent a majority of workers, meaning ¾ of the workers are needed to make collective agreements. (Watanabe)

Out of all the countries I selected, the United States has the worst record on income inequality and education. According to Hoagland, “From 1979 to 2007 for the top 1% of earners had an income growth of 275% where the bottom 20% saw growth of 18%” This is a trend that is more significant in the United States than any other OECD country. It’s empirically shown that for US and Germany, labor market participation increases significantly when education levels exceed from less than compulsory to secondary and post-secondary education. However, in the United States, 9.9 percent of adults have below an upper secondary education, meaning a high school diploma, 45.7 percent of its working age population has a college degree. 44.5 percent of adults have a high school degree. (OECD) Not to mention that tertiary education currently sits at an extremely high price for a prospective student.

Unemployment and poverty risk have increasingly become concentrated among workers with low levels of education while the government has become more permissive of cuts in unemployment generosity and income assistance to the poor. Reductions in unemployment insurance benefits give an explanation of why redistribution responsiveness to unemployment has declined. (Pontusson) 1996 welfare reform has significantly retrenched the social protection for single parents. (Seeleib-Kaiser) Even after the passage of the Affordable Care Act, health care is not universal and our insurance policy regarding healthcare is fragmented and highly contentious with progress seemingly not in sight. Liberal market economies such as America depend on market provision and means tested public social policy to provide for its most vulnerable.

There has been a OECD trend that there has been increasing decentralization within collective-bargaining systems. Starting in the 1980s membership in unions have declined to a significant degree. According to Xu, “de-unionization accounts for 20 percent of the increase in wage inequality for US males in 1980s” this is indicative of the trends that have followed us these last three decades. Strong unions would ensure that its workers were taken care of because they would have power and sway with the workplace and have been seen to coordinate and make sure that the worker has a say in management. (Xu) Diverse variations in industrial relations in America that used to create competition and job fluidity are also now creating problems. There is no significant employment protections to speak of in the United States. Outsourcing has exacerbated the fragmentation of American decentralized unionization in fact, according the Bureau of Labor statistics, union membership is at an all-time low at 11.8 percent from 20.1 percent in 1983. Unions are no longer able to organize workers to the extent that they used to. The US has a voluntarist employment relation with significant difference among sectors in how they approach unionization and the structure of union representation. (Katz)

Although German income distribution has been generally stable, differences became apparent in the 1990s and have largely been driven by atypical employment. In the mid-1970s 85 percent of employment was full time, but by the mid-1990s it had fallen to 67 percent, as a result median wages have fallen, and the wealth gap has increased. Germany does very well on the education front meaning that they get more citizens through high school than either Japan or the United States. In Germany, 58.2 percent of working age adults have an upper secondary education, 28.3 percent have a college degree, and 13.5 percent of adults have not graduated upper secondary education. (OECD) However, College education is provided free from the government, which as seen its benefits since Germany is the country I picked with the lowest rates of income inequality. Occupational apprenticeship plays a key role in Germany, it is integrated in the high school curriculum and operates as a de facto training skill structure. Germany is unique because it has experienced the reunification of west and east. At the time of reunification East German GDP per captia was only 57 percent of western levels. Incorporating east Germany into the west has proved to be difficult as the economy of the east was restructured

Germany social security expenditure in 1996 was 37.68 percent of their national income. The reason that expenditure is so high is because, social welfare is a right that every German citizen has due to their constitution. They have free health care and education, while still providing most of the free services through private sectors. (Takegawa) But due to slow growth and a growing government debt, there has been some welfare retrenchment. Retrenchment leads to a decrease of actual social cohesion, key to Germany’s solidarity, because collective redistributive public benefits are cut. They have government-sponsored job training programs and maternal leave. In the early 1990s, the Kohl government cut more than 800 billion dollars’ worth of social benefits. (Lane) Negotiated benefits by unions have historically compensated losses caused by retrenchment policies. “Retrenchment describes policy changes that either cut social expenditure, restructure welfare state programs to conform more closely to the residual welfare state model.” (Trampush)

A good quote by Seeleib-Kaiser that notes Germany’s distinction from both Japan and the United States; “Germany continues to constitutionally guarantee a legal entitlement to minimum social protection for all citizens, such a guarantee does not exist in the United States” Germany’s conservative welfare states rely on social insurances to provide protection with the aim of social cohesion and stability. However, there is a significant problem of dualism where insiders get most of the benefits and the outsiders within a welfare system are not being provided with adequate redistribution. To qualify for welfare in the US, your social protection is dependent on occupation and industrial citizenship. But in Germany it’s a different story all together, welfare is an integration of social insurance schemes that attempt to minimize the breadth and depth of outsider status. While welfare benefits are decreasing in post-industrial society, unionization is too. The service sector is more difficult to unionize due to the nature of the industry.

Unemployment was short term during the 70s, as 60-70 percent of unemployed were entitled to unemployment insurance benefits at a replacement rate of 68 percent. But now, long term unemployment is a bigger issue due to the lack of labor flexibility in the market making business less likely to employ workers who are difficult to fire. (Seeleib-Kaiser) Germany’s unions are distinguished by a system of codetermination, meaning that the workers have a right to participate in management decisions. This is demonstrated through their heavy use of works councils. Sectoral collective bargaining also plays a substantial role in Germany’s labor negotiations. Renowned for the strength of its inclusive unions. Extensive coverage of its sectoral collective bargaining system, and the dual structure of broad employee rights through works councils and supervisory boards. Like Japan and the United States, membership declined in unions especially in the 1990s. There has been some work organizational restructuring but not on the level of the United States and Japan. However, with the introduction of framework agreements are becoming more prevalent in collective bargaining, the decision-making procedures are becoming increasingly decentralized. Firms are subject to limitations due to codetermination that is within the law. But even works councils are experiencing declines, it decreased from 36,300 in 1980 to 33,000 in 1994(Katz) This decentralization of managerial responsibility has made it difficult for unions to know who to negotiate with. The has been a weakening of integral structures of the balance of roles between unions and works councils. Another hurdle to unionization is the new “mini-job” which was introduced in 2003. It was initially to create work incentives for those with low income and to address the high unemployment rate especially of low-skilled people. Although marginal employment is higher for women and students in the short run, it is questionable that these mini-jobs will actually lead to full time employment. (Caliendo) The result does not spell well for income inequality and seems to have created an overall decrease in full time work and an increase in part time work.

All in all, access to education, wealth redistribution, and the prevalence of unions all play a pivotal role in the rate of income inequality. The Japanese Gini Coefficient as of 2015 is 0.33. The German Gini Coefficient is 0.289, and America’s record on inequality 0.394. Wealth redistribution is going to play a bigger and bigger role in the coming years as the rise in inequality affects children’s wealth backgrounds rise simultaneously. (Pfeffer) Distribution of educational opportunity to the coming generations will line up with extreme wealth inequality. The more affluent “insiders” will be able to afford the rising costs of education without taking out the undue burden of student loans. Affordability of education, worker’s rights, and a basic standard of living is crucial to creating and finding jobs that would combat income inequality in the changing labor landscape. This is especially relevant when looking at United States’ higher education system. Germany leads the pack when addressing access to education, especially since higher education is free in Germany. Although Education is not free in Japan it does better on income inequality than the United States, but that seems to be due to the Japanese commitment to lifetime employment through on-the-job training by firms. Japanese enterprise unionism is unique, individualized, and effective although not as effective as it used to be. Across the board, rates of union membership have decreased as well as the structures that allow unions to be effective. Full-time employment, worker’s rights, and investing in human capital are all key to creating a thriving workforce that allows the people to provide for themselves and we’ve seen a reduction in the availability of those jobs for the unskilled worker.